RBI likely conducted $600-$800 million USD/INR swaps on Tuesday: Traders

The Reserve Bank of India (RBI) likely conducted dollar-rupee buy/sell swaps for about $600 million-$800 million on Tuesday, while intervening in the spot forex market to prevent the rupee from sharper depreciation, five traders said on Wednesday.

In a dollar-rupee buy/sell swap, an entity buys dollars on the spot date and sells them at a later date.

The one-month swap was likely intended to neutralise the liquidity impact of RBI's spot market dollar sales on Tuesday and to absorb inflows into Indian debt and equity markets, a foreign exchange trader at a state-run bank said.

At the time of maturity of the one-month swap, the RBI can absorb inflows to raise the dollars, lowering their impact on spot dollar-rupee rate, traders said.

Foreign inflows into India have jumped over the past few weeks and traders expect them to be robust near-term.

Overseas investors have bought Indian equities worth $2.5 billion so far in December, pushing the monthly tally to the highest since July. Indian bonds have attracted inflows worth $437 million in December after a 6-year peak inflow of $1.78 billion in November.

The Indian rupee was last quoted at 83.35 against the US dollar and has depreciated about 0.7% in the year so far.

"RBI's simultaneous FX operation via spot and derivative route is hinting at the desire for making such interventions neutral for domestic rupee liquidity," Vivek Kumar, an economist at QuantEco Research, said.

With India's core banking system liquidity in surplus and inflation expected to inch up, the central bank would be wary of any unintentional easing of monetary conditions, he added.

The RBI may continue intervening in the FX markets to prevent a sharp depreciation in the rupee, Swati Arora, a senior economist with HDFC Bank said.